Benchmark yields dip below 3 pct on economic worry

By Chris Reese

NEW YORK (Reuters) – U.S. Treasury debt prices rose Wednesday, pushing benchmark yields back below the key three percent level as worries over the tepid pace of economic growth spurred investors to buy into lower-risk assets.

The growth worries were fueled by Federal Reserve Chairman Ben Bernanke Tuesday when he said the recovery was fragile, and that while he expects the economy to strengthen in the second half of the year the job market bears close monitoring.

A sputtering recovery, as exemplified by jobs growth that was well below expectations last month in the government’s non-farm payrolls data released last week, has investors pushing back expectations for an interest rate increase from the Fed.

Federal fund rate futures do not fully price in a fed funds rate of 0.25 percent until May of 2012, although few investors expect the U.S. central bank to embark any time soon on another round of stimulus following the end of the current Treasuries purchase program scheduled to end this month.

“We open up another session with the Treasury market once again firmly bid across the curve continuing yesterday’s afternoon rally. With Chairman Bernanke clearly stating the accommodative policies would be intact for some time and the extremely poor economic data it seems hard pressed that Treasuries will be staging a large backup any time soon,” said Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York.

Fears of a slowing recovery last week pushed benchmark 10-year Treasury note yields down to 2.94 percent, the lowest in six months.

The rise in prices Wednesday pushed benchmark yields back below the three percent mark, with 10-year notes trading 5/32 higher in price to yield 2.98 percent, down from 3.00 percent late Tuesday.

Demand in an auction of $21 billion of reopened 10-year notes Wednesday could be somewhat crimped by the rise in prices. Yields on the 10-year note in the “when-issued” market , considered a proxy for the expected high yield in the auction, were trading near 2.99 percent Wednesday morning.

The Treasury sold $32 billion of three-year notes Tuesday, and will auction $13 billion of reopened 30-year bonds Thursday.

Still, concern over flagging growth dominated trade.

“We have shifted our yield forecasts downward, with 10-year yields trading around 2.75 percent for much of the rest of this year, before possibly rising to 3.25 percent by the end of the year as the risk of recession has clearly risen,” said Dominic Konstam, head of interest rate strategy at Deutsche Bank in New York.

Two-year Treasury notes were trading unchanged in price to yield 0.40 percent, while the 30-year bond was 14/32 higher in price to yield 4.24 percent from 4.26 percent late Tuesday.

The Treasuries market was also supported Wednesday by the Fed’s plans to buy $5 billion to $7 billion of Treasuries maturing June 2015 through November 2016. (Editing by Chizu Nomiyama)